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ESG integration helps returns, volatility: State Street survey

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Integrating environmental, social, and governance (ESG) factors into investment policies generates strong returns and can dampen volatility, according to an investor survey by State Street Global Advisors (SSGA).

SSGA questioned 475 institutional investors from around the world, and found that eight in 10 were satisfied or very satisfied with the returns from their ESG investments.

In addition, State Street found that 69% of the respondents indicated that ESG strategies had assisted in keeping volatility in check.

A majority of the surveyed investors said that they planned to increase their responsible investments.

ESG integration varied from those excluding certain categories of companies, to and investment targeting firms that score high on ESG criteria. The form of investors’ engagement was also included in the study.

Although a significant majority of investors already applied ESG criteria in their investment process, the proportion of the investment portfolio subject to the criteria was limited. The research revealed that 44% of institutional investors had less than a quarter of their assets invested in this way, with 17% indicating it applied to more than half of their investments.

State Street said it expected that the average proportion of ESG-integrated investments would increase to 40% in the coming years.

The asset manager noted that investors planning to extend their ESG strategies were facing obstacles, such as difficulties in finding a benchmark and a lack of uniform ESG definitions and standards.

Other problems included assessing asset managers’ ESG credentials, the costs of ESG integration, and a lack of in-house expertise.

The survey included investors in the Netherlands, UK, France, Germany, the Nordics, Italy, and Switzerland.

In separate research published this week, consultancy firm Cambridge Associates found that unlisted impact investment funds in asset classes such as timber, real estate and infrastructure could generate returns similar to those from funds without a specific environmental tilt. However, the research noted that fund selection was key to successful allocations. The report is available here.

Last month, asset manager Hermes found a link between higher credit spreads and weaker ESG scores for corporate bonds.